But here’s term you might have heard today: circuit breaker.
A circuit breaker in the US stock market is a mandatory, automatic, trading halt when things seize up. Its purpose is to allow people to take a deep breath and find buy orders to match sell orders. After all, for every seller, there needs to be a buyer.
Specifically, if major market indices like the S&P 500 or Dow-Jones Industrials fall by 7%, the circuit breaker trips and there’s an automatic trading halt for 15 minutes. Further halts are set at -13% and -20%.
Circuit breakers were first created after the 1987 Crash when market indexes fell by 22% in one day, direct, non-stop. Trading halts are actually quite rare-- the last ones being during the Great Financial Collapse of 2008. They don’t mean anything other than there’s a mismatch of sellers and buyers. They reflect a condition, not a forecast.
That’s all we’re going to say about today’s trading because the thing we really need to guard against is recency bias—the natural tendency to over-weight what’s recent to the exclusion of what's important. What's important is what you can control and what you can do now.
There are four categories of investors, each of which have different imperatives and opportunities. Find your niche.
I. You're under the age of 40 with relatively small investment holdings.
Now is when to find all the money you can and pour it into whatever investment plans you have. Years down the road and in the grander scheme of things, you’ll look back on this and see it as a great opportunity. You’ll wonder why people didn’t dig in with both hands. We know the answer already. Just notice the fear and anger and confusion in your social media feeds.
II. You're in your 40’s or 50’s, employed and building wealth, mainly in tax-deferred workplace savings plans.
II. You're in your 40’s or 50’s, employed and building wealth, mainly in tax-deferred workplace savings plans.
(1) If you’re not contributing the maximum to your 401k, 403b, 457, or whatever workplace plan you have, get started. Now. And make at least 80% of your contributions to equities.
(2) At a minimum, rebalance your holdings to their prior asset allocation targets. This may mean shifting some money from bonds to stocks. If that makes your stomach churn, just know that you’re pre-paying for future gains.
(3) If you’re truly serious and aggressive about building wealth, you'll add 10% to the equity side of your asset allocation target. So, if you were a 60/40 investor last week, it’s time to go to 70/30.
III. You’re in the retirement red-zone—the five years before and after retirement.
(2) At a minimum, rebalance your holdings to their prior asset allocation targets. This may mean shifting some money from bonds to stocks. If that makes your stomach churn, just know that you’re pre-paying for future gains.
(3) If you’re truly serious and aggressive about building wealth, you'll add 10% to the equity side of your asset allocation target. So, if you were a 60/40 investor last week, it’s time to go to 70/30.
III. You’re in the retirement red-zone—the five years before and after retirement.
This is the most challenging time in which to “stay the course.” Re-balance to your target asset allocation. This might mean to sell some bonds and add some equities.
Since you’ve been working with us, you already have an asset allocation designed to preserve wealth, i.e., maintain the purchasing power that allows you to continue traveling, going on cruises, making donations and gifts, getting quality health care, and sustaining your lifestyle.
The challenge here is that likely future bond returns will not pull the portfolio weight they had in the past.
The challenge here is that likely future bond returns will not pull the portfolio weight they had in the past.
➤ Making these periodic posts to keep you informed and focused on the long term, the big picture, and getting on with your life.
➤ Reviewing client portfolios for possible misalignments between holdings and life stations. When we find them, we'll contact you for a review. In the meantime, if you'd like a consult, please contact us.
➤ Since we eat our own cooking, we stay informed, focus on the long-term, the big picture, and get on with our lives.
Jim Cosgrove, Dir of Research, San Jose, CA jimcos42@gmail.com 408-674-6315
